Economic activity in the Seventh District continued to expand in October and early November, but at a slower pace than in the previous reporting period. Consumer spending was mixed, and business spending rose at a reduced pace. Labor market conditions varied by industry and location. Residential construction continued to decline, while nonresidential construction increased overall. Expansion in manufacturing eased from the previous reporting period. Credit standards tightened, but this did not appear to crimp household or business borrowing. Wage and cost pressures changed little from those in the previous reporting period. Corn and soybean prices moved higher, despite a record corn harvest.

Consumer Spending
Consumer spending was mixed, with slower retail sales in some areas of the District and slight increases in others. Retailers attributed the declines to households' worries about the economy, higher gasoline prices, and above normal temperatures. A report from Michigan indicated that people were spending less when they shopped and ate out. In contrast, a restaurant chain found demand to be "surprisingly robust" for the Midwest. Furthermore, consumer electronics, luxury goods, and online sales performed well. Retailers continued to be cautious about the upcoming holiday season. Auto dealers reported flat sales during October and early November. Vehicle inventories generally remained a bit elevated, though had come down to comfortable levels for some dealers. Tourism activity declined slightly with a contact from Michigan saying that leisure travel was weaker because people were being more cost-conscious.

Business SpendingBusiness spending moved somewhat higher during the reporting period. Overall, capital spending plans for 2008 remained above the levels of 2007. One firm even noted that, unlike the past several years, they were not curtailing their capital spending for next year from their initial plans. In contrast, some planned increases in capacity have been delayed or cancelled, notably in the construction materials and biofuels sectors. Labor market conditions improved slightly in Illinois, Iowa, and Wisconsin, but declined in Indiana and Michigan. Layoffs were announced in manufacturing, mainly related to the auto and construction materials industries. Yet hiring continued in other sectors, and shortages of skilled and professional workers lingered. A staffing firm experienced flat volume in District states. Traditional seasonal retail hires lagged those of previous years, as hiring plans shifted toward staffing online sales departments. Looking ahead, contacts thought that permanent additions to the retail work force would be limited. In addition, the potential for fallout from the housing and finance sectors on economic activity was contributing to uncertainty about future hiring needs.

Construction and Real Estate
Residential construction and home sales in the District continued to decline slowly. Many contacts said that a tightening of credit has contributed to declines in local housing markets. Showroom traffic slowed throughout the District. Cancellations began to edge up again in both Illinois and Michigan, as customers had to withdraw from new home contracts after failing to sell their existing homes. Residential rents came under pressure, as builders put vacant homes up for rent. Contacts projected that building conditions would be weak until at least mid-2008. However, there was some positive news. Several contacts thought that activity may be bottoming out in some areas. Another contact said that the declines in home prices in Michigan have begun to pull some buyers into the market. The rate of increase in overall nonresidential development slowed, though infrastructure construction quickened. Contacts said that the ongoing volatility in financial markets has decreased the financing available for nonresidential development projects. One contact reported that construction of retail space was still strong; another commented that banks were still being built. One builder thought that nonresidential construction would become more competitive as residential construction companies move into the market. Nonresidential rents rose gradually, though in Michigan office rents were flat from the last reporting period.

Manufacturing
Manufacturing growth eased compared with the previous reporting period. Manufacturers in many industries reported increases in the already strong demand for exports. An electronics manufacturer reported "phenomenal" growth to the point that they had to turn away business. Domestic steel production continued to move ahead, especially with the moderation of imports. Demand for large agricultural machinery, energy extraction, and mining equipment continued to be robust. In contrast, domestic demand for other types of heavy equipment, including construction machinery and trucks, was weak. Aerospace production schedules slowed, though backlogs for some aircraft parts, which are as high as a year for engines, persisted. Automakers lowered expectations for light vehicle sales, especially for less fuel efficient vehicles and older models. In response, third shifts will end at some assembly plants in the near future with repercussions likely for parts suppliers. Gypsum wallboard capacity and utilization declined, even as older plants were being shut down to make room for more efficient operations.

Banking and Finance
Credit markets tightened again during October and early November. Mortgage originations showed stability in some areas, but were subject to tighter lending guidelines and more likely to have fixed-rate terms. Inquiries picked up for refinancing to fixed rate mortgages, though there was less demand for cash-out refinancing. Home equity loans and lines of credit drew a little more interest due to lower interest rates. A bank reported reduced competition in the market for mortgages as restricted access to credit forced out some competitors who lacked adequate liquidity. Business loan demand continued to show modest growth despite slightly higher credit standards, and lending from banks increased to meet the needs of commercial and industrial borrowers. The commercial paper market improved some, as pricing structures adjusted to changes in the market environment. However, there was general concern and uncertainty about how prolonged declines in real estate prices would affect the lending industry.

Prices and Costs
Pressure from wages and costs did not change much compared to the previous reporting period. Manufacturers indicated that most input costs were stable, but they were waiting for increased costs due to higher oil prices and metal prices continued to be volatile. The slowdown in construction has led to further declines in wallboard prices and held down price increases for some other construction materials. More expensive raw materials have started catching up to firms that had successfully hedged against earlier cost increases. The ability to pass higher wholesale prices onto consumers varied by product category. Concerns were expressed about higher food costs resulting from the increased use of agricultural products to produce fuels. Wage pressures were evident in areas experiencing shortages of skilled labor, but were minimal in other sectors. Contacts cited union wage increases in the construction industry as a factor in the cost base of new homes. A few contacts reported that health insurance cost increases were a major issue.

Agriculture
Corn and soybean prices moved higher during the reporting period, despite a record corn harvest. The District corn harvest was boosted by both a large increase in acres planted and by higher yields; the District soybean harvest was smaller than a year ago due to both a reduction in acreage and lower yields. Cash prices for both corn and soybeans rose enough relative to futures prices to reduce incentives to store crops into 2008. More farmers than usual have sold corn and soybeans from future harvests. Demand from local ethanol plants helped to ease transportation problems for crops. Cattle prices were stable; milk and hog prices moved down. The pace of hog slaughter firmed compared to September. There was a shortage of pastures, and hay was at a premium.